The Relationship Between Institutional Investor's Shareholding Characteristics And Earnings Management

The earnings management causes the accounting information can not objectively and fairly report the business situation of enterprises, it will mislead investors'and regulator's decision, seriously impact the effective allocation of social resources. Therefore limited and constraint earnings management is very important. Institutional investors as a important role in the capital market gained a rapid development in recent years in Chinese capital market. Institutional investor is a professional investment institution, has powerful information collection, analysis and decision-making ability, so it can play an important role in corporate governance, asset pricing, information disclosure, which is also the main reason of the China Securities Regulatory Commission and related departments strongly support the development of institutional investors. However, after nearly decade of development, the performance of institutional investors on corporate governance is different because of difference on holding, holding time and supervising cost. Active holding institutional investor will engage to the corporate governance, monitor earnings management. Negative holding institutional investors will not monitoring earnings management. This study based on the institutional investor's holding characteristics, study the difference on constraint earnings management, and test the nonlinear relationship between institutional investor holding and earnings management, based on those we set up a mechanism to constraint earnings management.The thesis is divided into six chapters:The first chapter is the introduction, introduces the research background and worth of the topic, contents and technology roadmap; The second chapter is literature review, collates and summarizes the research of earnings management related research, institutional investors supervisory role and the relationship between institutional investor and earnings management; chapter three is the theory analysis of how institutional investors influence earnings management, we build up a game theory model between institutional investors and corporate managers about earnings management, analysis the influence of institutional investor holding and supervising effect to earnings management, analysis the institutional investor decision process and find out the conditions that the institutional investors will constrain earnings management; Chapter four check out the relationship between institutional shareholding and earnings management, between institutional type and earnings management by empirical study; Chapter five set up an earnings management constraint mechanisms, analysis the relationship between them and the constraint effect by empirical study; Chapter six is the conclusions and Outlook.The main conclusions are as follows:first, Game theory analysis results show that the proportion of institutional investors holding and monitoring cost are important factors that will affect institutional investor's wish of supervising earnings management, only when the holding is large and the monitoring return is bigger than cost, the institutional will monitoring earnings management. Second, we took institutional investors half year report from December 2002 to December 2008 as samples and classified concentration, turnover and sensitivity to earnings of their holdings, then classified the holding type to active, negative and mix, the results show that the active holdings will constraint earnings management, the negative holdings will stimulate earnings management, the relationship between sum of institutional investors holdings and earnings management is inverted U-shape. Finally, we set up three earnings management constraint mechanism based on the institutional governance.The contributions of this paper are as follows:(1) Build the game model between institutional investors and corporate managers on earnings management, find out the theory condition of constraining earnings management by institutional investor.Considering the types of institutional investors, set up the game model of institutional investors and corporate management, further simulates the decision-making process on the institutional investors and corporate management. The study found that institutional shareholding and the cost of supervision are important factors in supervision. Whatever type of institutional investors, when the shareholding is low, the institutional investors will not constraint earnings management; Only when monitoring costs are lower, the shareholding is higher, the active institutional investors will constraint earnings management. In theory, we confirmed that the institutional investor attitude on whether to constraint earnings management is different when the characteristics are different.(2)Build up a multiple regression model of holding differences and sum of institutional shares, we confirm that active holding will constrain earnings management, while negative holding will stimulate earnings management, the relationship between institutional shareholding and the earnings management is an inverted U-shaped relationship.In previous studies, there has been conflicting research findings about the proportion of institutional shareholding and influence on earnings management, because the differences of holding characteristics will lead to different holding type, thereby affecting the institutional investor's participation willing of corporate governance. In this paper, we transfer the holding characteristics into holding difference of the listed company based on theoretical model, and divide them effectively. This paper examines the differences effects of institutional investors holding types on earnings management, we found the inverted U-shape relationship between institutional shares and earnings management.(3) Build up an earnings management constraint mechanisms based on institutional investors governance, elaborate the channels and relationship among the mechanisms.Based on institutional investors governance, we set up 3 earnings management constraint mechanism:incentive, active and independence mechanism. We also analysis the mechanisms and internal links between them, extensive research of corporate governance. We believe that the incentive mechanism is the main effective, it will stimulate enterprise managers to supervise willing, increase the supervise efficiency; the active and independence mechanism are support mechanism, they are the Platform and transmission media of the supervisors play their roles.